Combat Short Sale Fraud with an Arm’s Length Affidavit

September 6, 2011

In Freddie Mac's recent Executive Perspectives blog, Teaming Up to Fight Short Sale Fraud, we discussed the impact and trends of short sale fraud within the mortgage industry. To assist Servicers in combating this type of fraud and ensure the integrity of short sales of properties secured by Freddie Mac mortgages, we require the use of an Arm's Length Affidavit that consists of notarized signatures of all parties involved in a short sale transaction. Announced in Single-Family Seller/Servicer Guide (Guide) Bulletin 2010-16, all Servicers are required to obtain an Arm's Length Affidavit at, or prior to, closing for all approved short sale transactions.

The Importance of an Arm's Length Affidavit in a Short Sale Transaction

An Arm's Length Affidavit is a formal, sworn statement of fact and acts as an important fraud prevention tool when a property is being sold for less than the total amount owned on the mortgage. The Affidavit promotes responsible servicing practices and helps protect the Servicer and Freddie Mac against a multitude of short sale fraud schemes. This includes a common scheme where borrowers sell their property to a prearranged straw buyer or family member who allows them to stay in the home after the short sale, with a greatly reduced mortgage obligation.

An Arm's Length Affidavit also helps prevent improper property flipping schemes in a short sale transaction by requiring the disclosure of any other sales contracts or agreements, including contracts for the resale of the property. Essentially, the Affidavit serves as a reminder about acceptable practices related to the sale of a property and that any misrepresentations may subject the responsible party to civil and/or criminal liabilities.

Creating an Arm's Length Affidavit

Servicers may customize their Arm's Length Affidavit, but should adopt best practices, which include creating an Affidavit that:

Is a stand-alone document.

Contains the name of the Servicer, the subject property address, the Servicer's loan number, and the contract date.

Provides separate lines for the parties' signatures, as well as a line for each signatory to print their name, along with the date of each signature.

Requires all parties to sign and date the Affidavit shortly before or at closing.

At a minimum, Freddie Mac requires the Arm's Length Affidavit to be signed and notarized by the following short sale participants:

Seller(s) (Freddie Mac borrower)

Buyer(s)

Real estate agents / brokers representing both the seller and buyer

Escrow/closing agent and/or attorney performing the closing

Transaction facilitator, if any (third party who is negotiating the short sale on behalf of the borrower)

Legitimate short sale transactions are an integral part of Freddie Mac's loss mitigation strategy and play a crucial role in the nation's housing recovery. A well-executed short sale helps distressed homeowners avoid foreclosure and stabilizes neighborhoods by preserving property values. With that in mind, to ensure complete transparency and disclosure from all parties involved in the short sale transactions for Freddie Mac mortgages, it is important to strictly follow our Guide requirements, including those requiring an Arm's Length Affidavit.

Get More Information

Leverage the following resources for more information, additional requirements on Arm's Length Affidavits and dealing with mortgage fraud: